Mastercard, Visa Moves in Debit Card Fee Battle Could Backfire

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Trefis) -- Visa ( V) and MasterCard ( MA) are increasing fees on small debit card transactions in response to the government's cap on debit card fees.

This move ultimately will hurt the companies as it may lead merchants to set a minimum amount for debit card transactions, thus reducing purchase volumes and fees. The debit card fees, known as interchange fees, are charged by Visa or MasterCard and paid to the issuing banks.

The Federal Reserve acted in June to limit the fees merchants pay when a consumer uses a debit card to 24 cents per transaction. The banks that issue debit cards hope to recover some of the lost revenue by increasing fees on smaller transactions.

Visa and MasterCard are the two largest payment technology providers in the world and compete with Discover Financial ( DFS), Capital One ( COF) and China's Union Pay.

We have a price estimate of $91 on Visa's stock, which is about 10% above the current market price. Our $322 price estimate for MasterCard is about 5% above the current market price.

See our full analysis of Visa here and click here for See our full analysis of Mastercard.

Banks are trying to recover their lost revenues by forcing card networks to raise debit card fees for small transactions, but the real hit from this move would be taken by the card networks themselves. Debit cards have been quickly replacing cash and checks as more people prefer the convenience of paying with a card. The growth in the number of transactions processed by Visa has grown from 37.7 billion in 2008 to about 54 billion currently.

It is possible that the fees that merchants pay on a $2 transaction, current about 8 cents, could nearly triple should the discussed increases take place. If merchants therefore decide to set a minimum purchase amount for debit card transactions, it would likely hinder the growth in total transactions processed by Visa and MasterCard. We currently estimate that Visa's processed transactions will increase to nearly 100 billion by the end of our forecast period, but could be as low as 80 billion if these changes are implemented.

This would lead to about 5% downside to our price estimate of Visa's stock. You can see the impact of total purchase volume on Visa's stock price by making changes to the chart above, and the impact to MasterCard's stock price in the chart below.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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